Income Tax Appellate Tribunal - Mumbai
Triumph Securities Ltd, Mumbai vs Assessee
1
Triumph Securities Ltd
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI ' J ' BENCH
MUMBAI BENCHES, MUMBAI
BEFORE SHRI SHRI D MANMOHAN. VP & R K PANDA, AM
ITA NOs. 1053 & 2111/Mum/2008
(Asst Years 2001-
2001-02 & 2002-
2002-03)
Triumph Securities Ltd Vs The Asst Commr of Income Tax
Radha Bhuvan 1st Floor ,Central Circle-40
121 Nagindas Master Road, Fort Mumbai 20
Mumbai 23
(Appelant) (Respondent)
PAN NO.AAACT2152P
Assessee by Shri Rajiv Khandewal
Revenue by Dr P Daniel
PER R K PANDA, AM
The above two appeals by the assessee are directed against the separate orders dated 21.1.2008 and 17.1.2008 of the CIT(A) - Central, VII, Mumbai relating to assessments years 2001-02 and 2002-03 respectively. For the sake of convenience both the appeals were heard together and are being disposed of by this common order.
ITA No. 1053/Mum/2008 (AY 2001-
2001-02)
02):
2 The assessee in its grounds of appeal no.1 has challenged the order of the CIT(A) upholding the action of the AO in not allowing loss of Rs. 60,04,791/- on share transactions.
2.1 Facts of the case, in brief, are that the assessee company has stated its business activities as mainly share and stock broking, investment and trading in 2 Triumph Securities Ltd shares and securities. The assessee company is a member of BSE. During the course of assessment proceedings, the Assessing Officer issued notice u/s 142(1) containing a detailed questionnaire. In the said questionnaire apart from asking for various details, the AO specifically asked the assessee to explain the details of transactions of shares in which total loss of 8901 crores has been incurred. He also asked the assessee to give details of purchase of shares and date of declaration of dividend, complete details of speculation loss of Rs. 58,11,300/-. The assessee did not submit the details on the due date. The AO issued another questionnaire and asked the assessee to furnish complete details with regard to each and every purchase and sale of shares. He also asked the assessee to specify whether these transactions are dealt on stock exchange or not?. He also asked the assessee to submit the details of know your clients (KYC) form in the case of clients with whom it has entered into these speculative transactions. Since the assessee did not respond to the questionnaire, the Assessing Officer again issued show cause notice and asked the assessee to explain why the loss of Rs. 58,11,382/- incurred on account of share transactions should not be disallowed in the absence of any evidence to prove the genuineness of the loss. 2.2 It was explained by the assessee that loss has arisen because of loss in delivery based transactions and in non-delivery based transactions. It was submitted that the loss is genuine. It was argued that it is a matter of public record that stock market crashed at the last quarter of the relevant year and the assessee has incurred heavy losses in the process. Referring to the reports of SEBI and JPC, it was stated that losses suffered by Ketan Parekh entities were in the range of ` 3000 to ` 4000 crores. It was also submitted that the business of similar nature in previous years was accepted and net profit was taxed after 3 Triumph Securities Ltd taking into the consideration the losses suffered in the speculative and non- speculative sectors of share trading. Referring to the various confirmation letters filed from various brokers including supporting documents, it was submitted that the business activity of the assessee is genuine and such confirmations were accepted in the past including the block assessment proceedings.
2.3 However, the AO was not convinced with the explanation given by the assessee. He noted that the loss is incurred prima facie on account of speculation loss and non-speculation loss. It is a common knowledge that the above concern belongs to Ketan Parekh group of entities. The relevant assessment year falls within the so-called year of the stock market scam and investigations were undertaken by various investigating and regulatory authorities to examine the role of the Ketan Parekh group of cases in stock market scam.
2.4 The AO discussed exhaustively the report of the SEBI and JPC and the modus-operandi adopted by the group. He noted that during the block assessment proceedings, in view of failure of assessee to provide confirmation letters in part of transactions and also in view of various ID mismatches (identity, volume rate) such transactions both speculative and non-speculative were treated as assessee's own transactions. Similar treatment was given in earlier years also. Many of the transactions of the assessee during the year are was also with such entities.
4
Triumph Securities Ltd 2.5 The AO noted that despite number of opportunities given by him, the assessee did not furnish full details. According to the Assessing Officer, it is the responsibility of the assessee to explain the differences, specifically in those cases where confirmation has not come or where confirmations are not complete. He noted from the figures disclosed in the P&L account under the head 'profit from operations' that the assessee has adjusted loss arising from non- delivery based transactions which are admitted to be speculative in nature. According to the AO, these transactions are neither spot transaction nor are contracted on the Bolt of the Stock Exchange. In certain transactions, the nomenclature of transactions appears to be brought forward which are non- delivery based transactions. Further, the assessee has not even submitted bills of transactions. On careful examination of the same, the Assessing Officer was of the opinion that the transactions are shown only in order to generate loss or generate profit and are not genuine share transactions. 2.6 He referred to the circular no.SMDRP/Policy/CIR-32/99 dated 14.9.1999 issued by SEBI which prohibited negotiated deals and cross deals except in the circumstances mentioned in the circular. According to the said circular, if transactions are done outside the floor of the stock exchange, it is mandatory for the broker to report such transactions. However, in the case of the assessee, no such report has been done to the Stock Exchange. He noted that the assessee has not submitted transaction wise statement showing specific date of payment received with regard to purchase and sale of delivery based transactions. In the absence of submission DP transaction statement, the verification of movement of scrips could not be done. It was submitted by the assessee that details of DP statement have been destroyed by white ants. The Assessing Officer noted that 5 Triumph Securities Ltd the assessee has not even submitted the DP account number. Rejecting the various explanations given by the assessee, the Assessing Officer came to the conclusion that losses in the speculative transactions are non-genuine. He, accordingly did not allow the same to be set off during the year and further did not allow the same to be carried forward being non-genuine. 3 Before the CIT(A), it was submitted that relevant bills were produced before the Assessing Officer . No manipulation was done by the assessee as alleged by the AO. The loss being genuine ought to have been allowed. It was further submitted that the actual loss figure amounted to Rs. 58,11,372/- and not Rs. 60,04,791/- as held by the Assessing Officer. Moreover, there is double addition in as much as the Assessing Officer added the same amount twice in the computation of income, since the Assessing Officer had added the amount of Rs. 58,11,372/- in the computation of income in order to arrive at the business income and thereafter, again made the addition of Rs. 60,04,791/- on the ground that the loss was not genuine.
3.1 However, the CIT(A) was not satisfied with the explanation given by the assessee. He noted that the assessee is a part of Ketan Parekh group of share brokers and traders which was found to be involved in security scam. The transactions made with most of the parties are part of the scam. The JPC report which has been exhaustively discussed by the AO had clearly brought out the nefarious activities of the entire group as a whole. The manipulated operation was carried through multi layered transactions, so that it was not possible to link the source of funds to the actual users. The buying and selling pattern of 6 Triumph Securities Ltd Ketan Parikh group created artificial trading volumes and facilitated price manipulation and such manipulations were carried on through the various sister concerns which led to the crash of stock market. The transaction, both speculative and non speculative carried on by the assessee fall in the same period. Therefore, the findings of the JPC report are clearly applicable to the facts of the case. He noted that the assessee failed to rebut the findings of the Assessing Officer that the transactions carried out by the assessee were manipulative and fraudulent in nature with an intention of distorting the market equilibrium for making personal gains. Further, the assessee has failed to produce any evidence to show that the transactions carried on by it were not off market transactions and were reported to the Stock Exchange. The assessee has also failed to controvert the findings of the Assessing Officer that the transactions were not off market cross deals banned by SEBI after 14.9.1999. He noted that various queries raised by the Assessing Officer remain unanswered and the adverse findings of the Special Auditors and the findings of the JPC have remained non-rebutted by the assessee before the Assessing Officer. Some of the pertinent points noted by the CIT(A) at para 5.5 of his order are as under:
a) The transactions made outside the floor of the Stock Exchange was required to be intimated as per the guidelines of SEBI
b) The assessee failed to submit necessary details, transaction wise showing specific dates of payment received with regard to sale and purchase.
c) DP transaction statement was not submitted. As a result, verification of the movement of fund could not be verified. An evasive reply was filed stating that they were eaten by termites. The reply shows the inattention of the appellant to conceal the real facts from the glare of the authorities.
d) Assessee did not even submit DP Account no. and the participant with which the account was maintained.
e) The assessee did not furnish copies of contract notes to the special auditors as also bank pay-in-slips and cheque counterfoils on the same plea that the same were destroyed by termites.7
Triumph Securities Ltd
f) The transactions made were off floor or cross deals which were not backed by payment position within a reasonable time." 3.2 The CIT(A) further noted that under identical facts his predecessor in the case of Sai Mangal Investrade Ltd has disallowed similar claim by holding that the assessee failed to prove the genuineness of the transactions. Similar conclusion has also been drawn by the CIT(A) in the cases of other group companies while deciding their respective appeals. Relying on a couple of decisions, the CIT(A) upheld the action of the AO holding that the so called loss shown by the assessee was not genuine one.
4 Aggrieved with such order of the CIT(A), the assessee is in appeal here before us.
5 The ld counsel for the assessee while challenging the orders of the CIT(A) and Assessing Officer submitted that all transactions were through terminal of the Stock Exchange and the transactions are appearing in the DP account. Therefore, the very basis of the Assessing Officer treating the transactions as non-genuine is erroneous and faulty. Referring to page 1 of the paper book, he submitted that loss from shares and securities was disclosed at ` 58,11,372/- whereas the Assessing Officer has wrongly taken the figure at ` 60,04,791/-. Referring to page 39 of the paper book, he submitted that the assessee vide letter dated 4.2.2004 has given the scrip wise details of speculation loss of ` 58,11,300/-as per Annexure 1. Referring to the said annexure, he drew the attention of the Bench to the item wise opening stock of quantity rate and value, 8 Triumph Securities Ltd purchase of quaintly, rate and value, sale/purchase during the year containing the details of quaintly, rate and value and the closing stock of quantity, rate and value. Referring to the said annexure, he submitted that contract note bill and De-mat account were also furnished before the Assessing Officer. He submitted that scrip wise details of profit and loss with supporting details were furnished. Therefore, transaction simply cannot be treated as non-genuine. He submitted that the observations of the Assessing Officer that assessee has submitted that details of DP account have been destroyed by white ant are wrong and erroneous and due to non application of mind. He submitted that the assessee never stated before the Assessing Officer that the DP statements have been destroyed by white ant. The Assessing Officer has merely copied the observations of another Assessing Officer in the case of a sister concern. Referring to the order of the Tribunal vide ITA No.4229/Mum/2007 order dated 27.4.2009 for the Assessment Year 2001-02 in the case if Sai Mangal Investrade Ltd, he submitted that the Tribunal under identical facts and circumstances has allowed the loss claimed by the assessee company since the CIT(A) while deciding the case against the assessee has followed his order in the case of Sai Mangal Investrade Ltd (supra) and since the Tribunal has set aside the order of the CIT(A) and allowed the claim of the assessee; therefore, the order of the CIT(A) should be set aside and the loss claimed by the assessee should be allowed.
5.1 Referring to the order of the Tribunal in the case of Jayant N Parekh vs DCIT vide ITA No.3129/Mum/2007 order dated 6.8.2010 for the AY 2001-02, he submitted that under identical facts and circumstances the Tribunal has allowed 9 Triumph Securities Ltd the claim of loss of `.1.45 crores disallowed by the Assessing Officer and upheld by the CIT(A) on the ground that transactions are not genuine in nature. He, accordingly, submitted that loss claimed by the assessee being genuine in nature and since full details were before the Assessing Officer, the order of the CIT(A) should be set aside and the claim should be allowed.
5.2 The ld Special counsel who appeared on behalf of the revenue, on the other hand, while supporting the orders of the authorities below submitted that the assessee belongs to Ketan Parekh group of companies and this is the scam year. Referring to page 402 of the paper book, he submitted that the assessee has raised bill to head office control account; therefore, the bill issued by the assessee to self amounts to a self serving document. He submitted that the assessee has never produced fund flow details. Referring to the observations given by the Assessing Officer on the basis of enquiry conducted, he submitted that the assessee wants to create loss to be set off against its huge other income like interest and miscellaneous income. He submitted that the CIT(A) has given clear cut findings for not allowing the loss claimed by the assessee. He, accordingly submitted that the order of the CIT(A) should be upheld.
5.3 The ld counsel for the assessee in his rejoinder submitted that the assessee is a member of BSE and trading is being done through its own terminal and the assessee cannot trade through the terminal of other members of the 10 Triumph Securities Ltd Stock Exchange since there is prohibition. He submitted that the assessee has application account with the Stock Exchange and the entire transactions are to be routed through the Exchange and the entire money has come out from the same account. He submitted that the assessee paid stamp duty on the contract. Referring to the order of the SEBI as relied on by the Assessing Officer/CIT(A), he submitted that there is no mention that scrips of those companies appears in the case of the assessee. H submitted that the scrips discussed by SEBI are different from those scrips traded by the assessee. He accordingly submitted that the order of the CIT(A) should be set aside and the loss claimed by the assessee be allowed.
6. We have considered the rival submissions made by both the parties, perused the orders of the authorities below and the paper book filed on behalf of the assessee. From the copy of the assessment order, we find the Assessing Officer made an addition of ` 58,11,372/- under the head 'speculation loss' and another addition of ` 60,04,791/- on account of share trading loss. 6.1 So far as the addition of `. 58,11,372/- on account of speculation loss is concerned, we find the Assessing Officer elaborately discussed the reasons for such disallowance which has already been brought out in the facts of the case. So far as the share trading loss of ` 60,04,791/ is concerned, we find the reasons given by the Assessing Officer is that the assessee did not furnish the movement of funds pertaining to the purchase of the shares. According to the Assessing Officer from whatever details furnished by the assessee, it appears that the scrips in which the assessee incurred loss are the same scrips, which 11 Triumph Securities Ltd the group has manipulated the prices as found out by the JPC and SEBI report. It is the submission of the ld counsel for the assessee that the shares on which losses have been incurred are not the same scrips as per the report of the JPC and SEBI.
6.2 We find before the CIT(A), it was argued that ` 58,11,372/- was added in the computation of income in order to arrive at th business income and further addition of ` 60,04,791/- was made on the ground that the loss was not genuine. Thus, there is double additions {para 4 of the order of the CIT(A)}. We find this aspect has not been decided by the CIT(A). According to the ld counsel for the assessee, various observations made by the Assessing Officer and the CIT(A) are contrary to the facts. We find despite number of opportunities given, the assessee did not furnish the details on the specified dates. We find the assessee vide letter dated 4.2.2004 addressed to the Assessing Officer has submitted the scrip wise details of the details of speculation loss of ` 58,11,300/-. Further vide letter 15.3.2004 submitted on 24.3.2004 the assessee explained the loss on trading of shares and securities amounting to ` 58.11 lacs. Although the ld counsel for the assessee referring to the details of speculation loss of ` 58,11,300/- tried to explain the justification of such loss by explaining the quantity, rate and value of opening stock, purchase, sales and closing stock and submitted that contract note, bill and demat account have been furnished before the Assessing Officer, we find the same were not properly verified by the Assessing Officer or by the CIT(A). It is also the case of the Assessing Officer that the assessee has not explained the differences specifically in those cases where confirmations have not come or where confirmations are incomplete. Under these circumstances, we are of the considered opinion that the matter requires 12 Triumph Securities Ltd fresh adjudication at the leval of the Assessing Officer on the basis of the various documents filed before him which appears to have not been properly examined by him. We, therefore, set aside the order of the CIT(A) and restore the matter to the file of the Assessing Officer with the direction to decide the issue afresh and in accordance with law after giving reasonable opportunity of being heard to the assessee. We hold and direct accordingly. This ground of the assessee is accordingly allowed for statistical purpose. 7 In grounds of appeal no.2, the assessee has challenged the order of the CIT(A) in not allowing depreciation of Rs. 18,28,125/- on membership rights of the Stock Exchange.
8 At the time of hearing, it was agreed by both the parties that the issue stands decided against the assessee by the decision of the Hon'ble Bombay High Court in the case of Techno Shares &Stocks Ltd & others reported in 84 Taxman
103. However, it has come to our notice that the above decision of the Hon'ble Bombay High Court has since been reversed by the Hon'ble Supreme Court wherein it has been held that the assessee is entitled to depreciation on stock exchange membership card. Since this issue was not argued in detail by either of the sides; therefore, in the interest of justice, we deem it proper to restore this issue back to the file of the Assessing Officer with a direction to decide the issue afresh in the light of the decision of the Hon'ble Supreme Court (supra) and in accordance with law. This ground of the assessee is accordingly allowed for statistical purpose.
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Triumph Securities Ltd 9 In grounds of appeal no.3 , the assessee has challenged the order of the CIT(A) in not adjudicating the ground relating to disallowance of depreciation of ` 4,64,727/- on computer systems, furniture and office equipments. 10 Both the parties agreed that before the CIT(A) a specific ground, as per 3(b) in Form no.35 was taken challenging the order of the Assessing Officer in disallowing without assigning any reason a sum of ` 4,64,727/- being depreciation on computer systems, furniture and office equipments. However, the CIT(A) has not adjudicated this ground and therefore, the same should be restored back to his file for adjudication. Since admittedly, the CIT(A) has not adjudicated the ground of appeal 3(b) before him; therefore, we restore this ground to his file for adjudication. Needless to say, he has to give due opportunity of being heard to the assessee and decide the issue in accordance with law. We hold and direct accordingly. This ground by the assessee is accordingly allowed for statistical purpose.
11 In grounds of appeal no.4, the assessee has challenged the order of the CIT(A) in upholding the action of the Assessing Officer in disallowing a sum of ` 1,49,62,136/- on account of bad debts.
11.1 Facts of the case, in brief, are that the assessee has claimed an amount of ` 2,30,92,877/- as bad debts in the P&L account. The Assessing Officer asked the assessee to prove the allowability of the deduction. The assessee explained 14 Triumph Securities Ltd that an amount of ` 21,56,580/- and ` 59,74,161/- are written off on account of bad debts from the franchises of the company at Indore and Valsad. Since the assessee could not prove to his satisfaction the fulfilment of the provisions of sec. 36(2), the Assessing Officer disallowed an amount of ` 149,62,136/-. 11.2 Before the CIT(A) it was submitted that the Assessing Officer never asked for any such details. The assessee furnished copies of the ledger account of the respective parties along with the bills of transactions undertaken on behalf of the parties in stock exchange. It was requested to consider such details and evidences as additional evidence/supporting documents, which could not be filed due to lack of sufficient opportunity allowed by the Assessing Officer. However, the CIT(A) noted that the Assessing Officer had called for relevant details pertaining to bad debts as per detailed questionnaire dated 9.12.2003 by seeking details of bad debt written off and basis for claiming the deduction. The assessment order was passed on 30.3.2004. Therefore, it is not correct on the part of the assessee to state that the Assessing Officer did not ask for necessary details or did not accord sufficient opportunity. Since the assessee failed to give justifiable reason for entertaining additional evidences before him as required under Rule 46A, the CIT(A) rejected the additional evidences and upheld the action of the Assessing Officer in making the disallowance. The CIT(A) further observed that even primary details were not furnished before the Assessing Officer and the onus is on the assessee to discharge the burden cast on it. Aggrieved with such order of the CIT(A), the assessee is in appeal here before us. 15
Triumph Securities Ltd 12 The ld counsel for the assessee referring to the evidences filed before the CIT(A) as additional evidence submitted that the same should have been admitted by him. He, accordingly, prayed that in the interest of justice the matter should be sent back to the file of the Assessing Officer for fresh adjudication.
12.1 The ld DR on the other hand while supporting the order of the CIT(A) submitted that he has no objection if the matter is restored to the file of the Assessing Officer.
13 After hearing both the parties, we find admittedly, the assessee had not furnished the full details before the Assessing Officer for allowing the claim of bad debts. We find the CIT(A) did not entertain the additional evidences filed before him on the ground that the assessee could not specifically explain the reasons for entertaining the additional evidences under Rule 46A of the I T Act. Considering the totality of the facts and circumstances of the case and in the interest of justice, we are of the considered opinion that the assessee should be given one more opportunity to substantiate its claim of bad debts. We, therefore, set aside the order of the CIT(A) and direct the Assessing Officer to give one more opportunity to explain the allowability of bad debts of ` 1,49,62,136/-. The Assessing Officer shall decide the issue afresh and in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The ground taken by the assessee is accordingly allowed for statistical purpose.
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Triumph Securities Ltd ITA No. 2111/Mum/2008 (AY 2002- 2002-03) 14 Before deciding other grounds, the grounds of appeal no.4 (a), in our opinion, has to be decided at the beginning. The assessee, in this ground has challenged the order of the CIT(A) in making enhancement of income by withdrawing deduction of expenses allowed under the head 'business income' and also not allowing carry forward of business loss on the ground that no business activity has been carried out during the year. 14.1 Facts of the case, in brief, are that the assessee has filed its return of income on 31.10.2002 declaring the loss of `. 7,27,08,940/-. The Assessing Officer while passing the order u/s 143(3) made various additions/disallowance and determined the total loss at ` 70,493,585/-. The assessee challenged the order of the Assessing Officer before the CIT(A). During the appellate proceedings the CIT(A) noted that the Assessing Officer had determined the business loss at ` 7.04 crores and allowed the same to be carried forward; although no specific mention of such fact has been made in the order. He noted that the assessee is debarred from carrying on share trading activity by SEBI as it along with other group concerns led by Shri Ketan Parekh was involved in Securities Scam which was unearthed in the year 2000. From April 2001, the whole group including the assessee could not carry out such trading. He noted that as per the past records, this was the only business activity of the assessee. However, the assessee was also earning certain residual income in the form of interest on FDR etc. He noted from the P&L account that major part of the 17 Triumph Securities Ltd income of the assessee was derived from other income amounting to ` 94.40 lakhs which included interest, dividend and miscellaneous income. Rest of other income comprised of brokerage and income from shares and securities etc., amounting to ` 2.45 lakhs and `. 2.07 lakhs respectively. The total receipts amounted to ` 98.93 lakhs only. Since the assessee has not furnished any details giving the exact nature of miscellaneous income, he assumed that such an income is residual income other than business income and is also liable to be taxed as other sources. However, the assessee has claimed deduction amounting to ` 8.10 crores as expenses, which included the bad debt and penalty, which cannot be attributed to earning the miscellaneous income as well as negligible income from shares and brokerage etc. Since no business as such was being carried out by the assessee, the CIT(A) noted that there is no question of allowing any deduction of the expenses.
14.2 Rejecting the explanations given by the assessee and relying on a couple of decisions, he noted that there was hardly any business activity during the year and the Assessing Officer had erroneously allowed the business loss to be carried forward. He, accordingly, issued notice of enhancement proposing to disallow the expenses claimed under the head 'business income' and withdrawing the carried forward loss. In absence of any response from the assessee till the date of passing the order, the CIT(A) held that the assessee is not entitled to claim any business loss and not entitled to carry forward the same for setting off in the subsequent assessment year. Accordingly, he directed the Assessing Officer to withdraw the entire deduction allowed under the head 'income from business' or 'profession' and also the amount of business loss 18 Triumph Securities Ltd carried forward to subsequent assessment years. Since the business loss would be ignored, he directed the Assessing Officer to tax the miscellaneous income comprising of interest etc, under the head 'income from other sources". Accordingly, there was an enhancement of income to the extent of business loss amounting to ` 7.04 crores, which has been wrongly allowed to be carried forward. Miscellaneous income aggregating to ` 94.40 lakhs, inclusive of interest income of ` 39.98 lakhs, was directed to be taxed, as income from other sources.
15 Aggrieved with such order of the CIT(A), the assessee is in appeal here before us.
16 The ld counsel for the assessee submitted that the assessee company is a Member of BSE and was debarred from undertaking any fresh business as a stock broker or merchant banker till further orders by SEBI vide its order dated 4.4.2001. He submitted that SEBI vide order dated 21.6.2001 passed another order holding that on receipt of the enquiry officer's recommendations, further decision as to whether prohibition to carry out fresh broking activity on the entities should be continued for a further period or it should be withdrawn, will be taken. He submitted that SEBI passed an order dated 8.3.2004 cancelling the certificate of registration granted to the company. The company then preferred an appeal to the Securities Appellate Tribunal (SAT) in April, 2004 against the order dated 8.3.2004 passed by SEBI and the appeal of the assessee was dismissed vide order dated 11.5.2007. He submitted that the company has not 19 Triumph Securities Ltd been delisted as member of the Stock Exchange. He submitted that the company has not discontinued its business operations but has been forced not to undertake any business activity by virtue of the aforesaid order of the SEBI, which was confirmed by the SAT. According to the ld AR though there is suspension of broking activity by virtue of the order of the SEBI, the company cannot be said to be not carrying on business during the period up to May, 2007or at least till 8.3.2004 being the date of cancellation of certificate of registration by the SEBI. Relying on a couple of decisions and more particularly the order of the Tribunal in the case of KNP Securities P Ltd vide ITA Nos. 5008 & 5009/Mum/2007, he submitted that under identical facts and circumstances, the Tribunal after considering a number of decisions has held that various expenses incurred by the assessee are allowable as deduction. He accordingly submitted that this, being a covered matter, the assessee is entitled to the business loss incurred by it and also for carry forward of the same. 16.1 The ld DR, on the other hand, supported the order of the CIT(A). 17 After hearing both the parties, we find identical issue had come up before the Tribunal in the case of KNP Securities P Ltd (supra) wherein the Assessing Officer had disallowed various expenses claimed by the assessee in its P&L Account on the ground that the assessee has not carried out any business activity since SEBI made restriction vide order dated 11.4.2001. In appeal, the CIT(A) upheld the action of the Assessing Officer and on further appeal, the Tribunal vide order dated 29.5.2009 allowed the various expenses claimed by the assessee. The relevant portion of the order of the Tribunal reads as under: 20
Triumph Securities Ltd "5 We have heard the rival submissions and considered them carefully. We have also perused the material on record along with various case laws relied by both the parties. After considering the relevant material it is seen that the assessee was doing business of share trading and security etc. Various business expenses incurred for the purpose of its business activities were held as allowable in past. In the year under consideration, the ld AO negatived the claim of the assessee for the reason that there is no business activity during the year under consideration as SEBI has imposed restriction vide order dated 11.4.2001. Copy of the order issued by SEBI is placed at pages 82 to 84 of the paper book. It is mentioned in this order that the assessee is barred from undertaking any fresh business as stock broker till further order as on account of indications of the prima facie involvement of Mr Ketan Parekh in manipulating certain scrips of various companies. It has been noticed that M/s V N Parekh Securities Ltd and M/s KNP Securities Ltd are also the entities controlled by and connected with Mr Ketan Parekh or Mr Kartik Parekh. Therefore, in view of the powers conferred under the provisions of sub section (3) of sec. 4 r.w.s 11 and 11B of the SEBI Act, 1902, the assessee was barred from undertaking any fresh business as stock brokers till further orders as stated above. Thereafter, SEBI passed another order on 21st June 2001 stating that in view of the order of SEBI dated 4.4.2001 and 10.4.2001 debarring them from undertaking any fresh business as a stock broker and merchant bankers till further orders should be continued. This action of the SEBI has been challenged by the assessee before the appropriate authorities. Copy of the petition filed before the Securities Appellate Tribunal is placed at page 94 of the paper book. In view of these facts and circumstances, the assessee was not allowed to do its business activity in share on the stock exchange floor. 5.1 Not doing business activity was not on account of assessee's will but on account of forced circumstances;
therefore, it cannot be said that the assessee has closed/discontinued its business activity its own. The establishments of the assessee were intact and they were to 21 Triumph Securities Ltd be maintained. Staff members were kept and salaries were paid to them. Loans taken from various banks and others for the purpose of business activity in past were outstanding during the year under consideration; therefore, any interest accrued was to be paid during the year under consideration or was payable. The assessee is having valid BSE card which could not be used for the reason that SEBI has passed an order barring the assessee not to do any business activity. Therefore, it also cannot be said that the assessee could not use the BSE card its own which was ready to use. In these circumstances, we are of the considered view that the assessee's business does not come to an end or discontinued.
5.2 The meaning of discontinuation is explained in the Law Lexicon where "it implies a voluntary act and abandonment of possession followed by the actual possession of another, it implies that the person discontinuing has given up the lend and left it to the possessed by anyone choosing to come in as held in the case of Qadir Bux vs Ramchand 1917 AIR 289 at page 295.
It is further explained at the same page at 563 of the law Lexicon that "discontinue; to cause to cease or to put a stop. 5.3 In the present case neither the business is discontinued on account of voluntary act of the assessee nor the same has put to stop its own. The business could not be done for the reason that SEBI has barred the assessee not to do any business activity till further orders. The assessee was barred till further orders clearly mean that the assessee was not barred permanently. The permanent order issued in the year 2007 and from the year of 2007, the assessee cannot do any business activity; therefore, at the most it can be said that no expenses can be allowed from that year.
However, for the earlier year, in our considered view, the expenses incurred by the assessee for the purpose of its business activity are allowable as the establishment was not scraped and the assessee was still hopeful to start its business activity.
6 In the case of CIT vs Vellore Electric Corporation Ltd reported in 243 ITR 529, the Hon'ble Madras High Court has held that:
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Triumph Securities Ltd "it could not be said that there was a permanent closure, as the validity of the Act was yet to be finally settled by the Supreme Court. In the event of the Act being struck down, the assessee could resume business. The fact that it had continued to maintain an establishment was indication of its intention to resume business, if an opportunity for it arose by reason of the Supreme Court holding in its favour. The expenses incurred by it while awaiting the decision of the Supreme Court could not altogether be regarded as unconnected with the business that it had been carrying on by supply of electricity and that business was interrupted only by reason of the Act. The possible resumption of the business was dependent on the outcome of the appeals pending before the Supreme Court. The amounts claimed were also not very substantial. The Tribunal had taken a broad view of the matter and had held in favour of the assessee. There was no ground to differ"
6.1 The facts before the Hon'ble High Court were that the assessee was a private electric company. Its undertaking vested with the State Government by reason of the enactment of the Tamil Nadu Electricity Supply Undertakings (Acquisition) Act, 1973. After an unsuccessful attempt to challenge the validity of that Act in the High Court, the assessee had filed appeals before the Supreme Court which were pending during the relevant years i.e. AYs 1975-76 to 1979-80. The AO held that the assessee was not carrying on any business and limited the salary paid to the employees of the assessee to 10% and the audit fee was limited to 15%. That was affirmed by the first appellate authority. However, the Tribunal held that the assessee was carrying on business and was entitled to the deductions claimed by the assessee. On reference, the Hon'ble Madras High Court affirmed the view taken by the Tribunal. 6.2 The ratio of the decision of the Hon'ble Madras High Court is squarely applicable on the facts of the present case as in the present case also the assessee was restricted by the order of the SEBI not to do any business activity, however, establishment of the assessee was maintained and various expenses were incurred which were necessary 23 Triumph Securities Ltd and they were connected with the business activity of the assessee.
7 In the case of Sree Meenakshi Mills Ltd, in 63 ITR 207, the Apex Court has allowed various expenses on account of expenditure for prosecuting civil proceedings. In this case, the assessee company which carried on the business of cotton spinning and weaving, finding its own handlooms in its factory premises inadequate, distributed yarn produced by it to weavers outside the factory. Under clause 18B of the Cotton Cloth and Yan (Control) order 1945, the Textile Commissioner was authorised to direct any manufacture or dealer or any class of manufacturers or dealers, inter-alia, not to sell or deliver any yarn or cloth of specified description except to such person or persons and subject to such conditions as he might specify. Accordingly, the order passed by the Textile Commissioner directing the company not to sell or deliver yarn manufactured by it except to such person or persons as he might specify. However, the company continued to deliver yarn to weavers outside factory. The action of the Commissioner was challenged before the appellate authority and the same was rejected by the High Court as well as the Supreme Court. On appellate proceedings, the expenses incurred by the assessee were claimed as business expenditure and they were not allowed by the AO by observing that these expenses were not for the purpose of business and were not incurred during the year under consideration. Matter reached up to the stage of the Hon'ble Supreme Court who has allowed the expenditure incurred by the company as business expenditure by holding as under:
"that the object of the petition was t secure a declaration that the order dated Feb 20th 1946, in so far as it sought to put restrictions upon the right of the company to carry on its business in the manner in which it was accustomed to do was unauthorised, and to prevent enforcement of that order. Thereby, the company was seeking to obtain an order from the court enabling the business to be carried on without interference. The amounts expended by the company n that behalf were expenditure laid out wholly and exclusively for 24 Triumph Securities Ltd the purpose of its business and were deductible u/s 10(2)(xv).
It was further held that;
"the question of admissibility u/s 10(2)(xv) had to be decided not on what was found or observed by the High Court in appeal from the order in the proceedings u/s 45 of the Specific Relief Act or by the Privy Council but upon the findings of fact recorded by the Tribunal.
Expenditure incurred to resist in a civil proceedings the enforcement of a measure, legislative or executive, which imposes restrictions on the carrying on of a business, or to obtain a declaration that the measure is invalid, would, if other conditions are satisfied, be admissible as a deduction u/s 10(2)(xv)"
7.1 The ratio of the decision of the Apex Court also goes in favour of the assessee as the litigation expenses incurred in respect to its business were held as business expenditure. 7.2 In the present case also all the expenses incurred are connected with the business of the assessee only; therefore, the expenses claimed by the assessee are allowable.
8 In the case of M/s Marine Labour Supplying Co, decided in ITA No.6048 & 6049/Mum/07 vide order dated 2.12.2008, the Tribunal by following the decision in the case of Ruia Shelters Ltd in 10 SOT 157 (Mum) and in the case of Chunilal &Co in 4 SOT 309(Mum(TM) held that if for the reason due to lullness of business no business can be done for AYs 2002-03 to 2005-06, the assessee is entitled to deduction in respect of administrative and other expenses which are required to be incurred for keeping the business alive.
9 We have also taken into consideration various case laws on which reliance has been placed by the ld DR and found that they are distinguishable on facts.
10 In the case of Chinai and Co P Ltd in 206 ITR 616, the Hon'ble Bombay High Court has held that the assessee company could not be entitled for any deduction of expenses 25 Triumph Securities Ltd claimed by it as business expenditure u/s 37 as the assessee company has stopped carrying on its business at the end of December, 1969. The mere fact that it continued to hold its investments would not be sufficient for the purpose of establishing that it continued to carry on business.
10.1 In the present case, the assessee has not stopped the business activity its own but it was forced by SEBI not to do any business activity. Therefore, the ratio of this decision of the Hon'ble Bombay High Court is not applicable on the facts of the present case.
11 Similarly, the decision of the Hon'ble Gujarat High Court in the case of Nathalal Asharam in 194 ITR 110 is also not applicable on the facts of the present case as the company paid compensation to its employees under the provisions of sec. 25 FFF of Industrial Disputes Act 1947 on account of retrenchment which were held as not related to the business carried on by the assessee.
11.1 We have also taken into consideration various other case laws relied upon by the ld DR and found that they are distinguishable on facts.
12 In the present case, no such facts are involved as all the expenses incurred were in connection with the business activity only and for keeping the business alive, to maintain its business establishment and to meet that the obligation of interest on loan etc taken for its business activity; therefore, we hold that various expenses incurred by the assessee are allowable as deduction. However, admissibility of the expenditure was not examined by the AO for the reason that he has disallowed the expenditure on the ground that they are not allowable as the assessee has not done any business activity. Therefore, for the purpose of examining the admissibility/genuineness of these expenses, the mater is sent to the file of the AO. The assessee has contended that depreciation and interest have been allowed by the Tribunal as allowable while passing order for AY 2000-01. The AO will take into consider the order of the Tribunal and if it is found that facts are similar then of course, in view of 26 Triumph Securities Ltd the decision of the Tribunal, the claim of the assessee on account of depreciation and interest has to be allowed." 17.1 Since the facts of the impugned appeal are identical to the facts in the case of the sister concern of the assessee i.e KNP Securities P Ltd ; therefore, respectfully following the decision of the Tribunal, we hold that the assessee is entitled to claim various expenses debited in the P&L account. We hold and direct accordingly. The ground raised by the assessee is accordingly allowed.
18 In grounds of appeal no.1, the assessee has challenged the order of the CIT(A) in upholding the action of the Assessing Officer in disallowing depreciation of `. 13,71,094/- on membership rights of BSE. 19 After hearing both the sides, we find this ground is identical to grounds of appeal no.2 in ITA No.1053/Mum/2008. We have restored the issue to the file of the Assessing Officer for fresh adjudication in the light of the decision of the Hon'ble Supreme Court in the case of Techno Shares & Stocks Ltd & others (supra). Following the same ratio, this ground of the assessee is allowed for statistical purpose.
20 In grounds of appeal no.2, the assessee has challenged the order of the CIT(A) in confirming the disallowance of bad debts of ` 8,4,514/- by the Assessing Officer u/s 36(1)(vii) r.w.s 36(2) of the Act. 27
Triumph Securities Ltd 21 After hearing both the sides, we find the assessee debited an amount of ` 8,40,514/- as bad debts. The Assessing Officer asked the assessee to justify the allowability of the same. It was submitted that the assessee has fulfilled the conditions specified in sec. 36(1)(vii) r.w.s 36(2), However, the Assessing Officer was not satisfied with the explanation given by the assessee. According to him, the assessee is a share broker and its credits only the brokerage income arising from the purchase or sale of shares on behalf of the clients. The share and stock broker buys and sells on behalf of clients from the stock exchange for which it earns brokerage income. The share broker is liable to tax on its brokerage income subject to allowance of expenses and other items. The value of purchase or sale on behalf of the clients is not credited or debited to P&L account. According to the Assessing Officer, part of the debit balance which does not pertain to brokerage and pertains to value of shares purchased by client is not covered by section 36(2). Therefore, in case the client does not pay in future, this debit cannot partake the nature of 'bad debt' allowable u/s 36(1)((vii) as this amount of debt has not been included in the computation of income as required u/s 36(2). Since the debt not collectible from the client, does not fall under the ambit of sec. 36(2), it remains outside the purview of sec. 36(1)(vii). On this basis, the Assessing Officer disallowed the claim of bad debts made by the assessee. 28
Triumph Securities Ltd 21.1 In appeal, the CIT(A) upheld the action of the Assessing Officer on the ground that the assessee has not carried out any business activity during the year. Aggrieved with such order of the CIT(A), the assessee is in appeal here before us.
22 The ld counsel for the assessee, at the outset, submitted that the issue of bad debts in the case of share broker is covered by the decision of the Special Bench in the case of DCIT vs Shri Shreyas S Morakhia reported in (2010) TIOL 390 (Mum)(SB).
22.1 The ld DR, on the other hand submitted that since the CIT(A) had held that the assessee has not carried our any business activity during the year, the same cannot be allowed as allowable deduction from the other income. 23 After hearing both the parties, we find the issue of carrying on of business has already been decided by us in favour of the assessee in grounds of appeal no.4(a). We find the Assessing Officer disallowed the bad debt on the ground that the assessee is a share broker and credits only brokerage income to its P&L account. Since the assessee has not credited the entire amount receivable from the clients on account of purchase on his behalf; therefore, such bad debt not collectible from the clients does not fall under the ambit of sec. 36(2). We find the issue is now decided in favour of the assessee by the decision of the Special Bench of the Tribunal in the case of Shri Shreyas S Morakhia 29 Triumph Securities Ltd (supra wherein it has been held that a share broker can claim the amount receivable from its clients as bad debts.
23.1 Respectfully following the decision of the Special Bench of the Tribunal in the case of Shri Shreyas S Morakhia (supra), we hold that the assessee is entitled to claim the amount of bad debts . The ground raised by the assessee is accordingly allowed.
24 In the grounds of appeal no.3, the assessee has challenged the order of the CIT(A) in confirming the disallowance of ` 3,750/- made by the Assessing Officer on account of penalty debited to the P&L account on the ground that the assessee has not carried out any business activity during the year. 24.1 Facts of the case, in brief, are that the assessee has debited an amount of `. 3,750/- on account of penalty/fine charged by the NSE for violation of Rules and Regulations viz. Violation of Gross Exposure Limit, Penalty for fund shortage, delay in reporting etc. The assessee being a member of NSE has paid this amount for contractual violations. Since the amount was paid under the head penalty, the Assessing Officer disallowed the same as non-allowable expenditure.
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Triumph Securities Ltd 24.2 In appeal, the CIT(A) upheld the action of the Assessing Officer on the ground that the assessee has not carried out any business activity during the year.
25 The ld counsel for the assessee, at the outset, submitted that penalty paid to NSE is an allowable expenditure as has been held by the coordinate Bench of the Tribunal in the case of ACIT vs Classic Shares & Stock Broking Services Ltd vide ITA no.4258/Mum/04 order dated 28.7.2006 for Assessment Year 2000-01. Referring to para 10 of the order of the Tribunal, he submitted that the Assessing Officer in the said decision disallowed an amount of ` 4,75,335/- on account of penalty paid by the assessee for violation of the provisions of NSE and in appeal, the CIT(A), deleted the addition. On further appeal by the revenue, the Tribunal in the said decision upheld the action of the CIT(A) and dismissed the ground raised by the revenue. 25.1 Referring to the order of the Tribunal in the case of KNP Securities P Ltd vide ITA Nos. 5008 & 5009/Mum/2007 order dated 29.5.2009 for AYs 20-34 and 2004-05, he submitted that the Tribunal under identical facts and circumstances has held that the assessee is carrying out business activity. In view of the above two decisions, he submitted that the issue stands covered in favour of the assessee.
25.2 The ld DR, on the other hand supported the order of the CIT(A). 31
Triumph Securities Ltd 26 After hearing both the sides, we find the Assessing Officer disallowed the amount of `3,750/- paid to BSE for violation of its Rules and Regulations on the ground that the same is in the nature of penalty and is not an allowable deduction. In appeal, the CIT(A) upheld the action of the Assessing Officer on the ground that the assessee is not conducting any business activity during the year. 27 The issue of carrying on the business has already been decided by us in favour of the assessee in grounds of appal 4(a). As regards to allowability of expenditure, the issue has been decided by the coordinate Bench of the Tribunal in the case of the sister concern i.e. Classic Shares & Stock Broking Services Ltd. (supra). Respectfully following the decision of the coordinate Bench of the Tribunal in the case of another sister concern of the assessee and in absence of any contrary material brought to our notice by the DR, we hold that the assessee is entitled to deduction of claim of ` 3,750/- being penalty paid to Stock Exchange for violation of its Rules and Regulations. The ground raised by the assessee is accordingly allowed.
28 In the grounds of appeal no.4(b), the assessee has challenged the order of the CIT(A) upholding the action of the Assessing Officer in holding that miscellaneous income comprising of interest etc., would also be liable to be taxed under the head income from other sources.
29 After hearing both the parties, we find the assessee has treated the miscellaneous income of ` 94,40,620/- as business income. From the details 32 Triumph Securities Ltd furnished by the assessee, we find the amount of ` 94,40,620 comprises as under:
i) Interest income ` 39,98,256/-
ii) Sundry Balance written back ` 23,680/-
iii)Sundry Balance written back(BSE) ` 49,86,634/-
iv) Other income ` 11,942/
v) Commission; bank charges, Stock Ex. Clearing charges ` 616/-
vi) Dividend income ` 37,707/-
vii) Miscellaneous Income ` 3,79,027/-
viii) Turnover charges collected ` 2,763/-
The Assessing Officer treated the entire income as 'business income' as claimed by the assessee. However, in appeal, the CIT(A) held that the same has to be treated as income from other sources.
29.1 From the various details furnished by the assessee we are of the opinion that only sundry balance written back on account of provisions u/s 41(1) can be treated as 'business income' and the rest of the items like interest, dividend,, miscellaneous income, turnover charges collected, commission income, bank charges and de-mat charges etc. has to be treated as 'income from other sources'. We hold and direct accordingly. This ground of the assessee is accordingly allowed partly.
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Triumph Securities Ltd 30 In the result, ITA No.1053/Mum/2008 for Assessment Year 2001-02 is partly allowed for statistical purpose and ITA No.2111/Mum/08 is partly allowed. Order pronounced on the 31st, day of Dec 2010.
Sd/- Sd/-
( D MANMOHAN ) ( R K PANDA )
Vice President Accountant Member
Place: Mumbai : Dated: 31st, Dec 2010
Raj*
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT
4 CIT(A)
5 DR
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai
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Triumph Securities Ltd